June 12 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit plans to shut down Old Lane Partners, the hedge-fund group he co-founded and sold to the bank last year for more than $800 million.
Citigroup will purchase most of Old Lane's assets, and clients can start withdrawing their investments beginning July 31, the New York-based bank said in a statement today. The wind- down is at least the fourth failure for Citigroup's hedge-fund management unit this year.
``It raises more red flags as far as the credibility of the board of directors as well as management,'' said Bill Smith, president of Smith Asset Management, which manages about $80 million and owns Citigroup shares.
Citigroup has booked more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. Pandit, who took over as CEO in December, outlined plans last month for the company to sell $400 billion of assets. More than a dozen hedge funds have closed, needed cash infusions or been liquidated this year. Peloton Partners LLP folded in March after wrong-way bets on mortgage securities.
Taking on Old Lane's holdings will increase Citigroup's assets by about $9 billion in the second quarter, the company said. Citigroup's so-called Tier 1 capital ratio, a measure of the bank's ability to absorb loan losses, would have dropped to 7.7 percent from 7.74 percent as of March 31 had those assets been included at the time, the bank said.
Recruiting Method
Citigroup Vice Chairman Lewis Kaden said in an April interview with Fortune magazine that the July 2007 Old Lane purchase was a way for the bank to recruit Pandit as well as John Havens, who was promoted in March to head investment banking, trading and hedge funds, and Brian Leach, who became chief risk officer.
``This transaction is an investment as much as it is an acquisition,'' ousted Citigroup CEO Charles Prince said of the deal in April last year, citing the 20-year track records of Pandit and Havens.
Citigroup has declined almost 40 percent on the New York Stock Exchange since Pandit, 51, took over in December. The shares rose 82 cents to $20.03 in composite trading at 12:04 p.m.
The bank took a first-quarter charge of $202 million to write down the value of its investment in Old Lane, according to a regulatory filing in May.
First-Quarter Loss
The writedown contributed to a net loss of $509 million in the hedge-fund unit during the first quarter. Overall, Citigroup reported a net loss of $5.1 billion, the second biggest in its 196-year history, because of writedowns on mortgage-related bonds and leveraged loans and an increase in consumer-debt delinquencies.
All former Old Lane partners, including Pandit, will be required to maintain their investments in the Old Lane funds or other designated Citi Alternative Investments funds.
``All investors in the fund -- third parties, Old Lane employees, Citi senior management and Citi proprietary investments -- will be treated consistently during the unwind process,'' Ned Kelly, chief executive officer of Citi Alternative Investments, said in the statement.
Pandit, Havens and Leach all worked at Morgan Stanley, the second-biggest U.S. securities firm by market value, before they co-founded Old Lane. Pandit received $165.2 million from Citigroup last year for his stake in Old Lane, then reinvested $100.3 million, after tax, into the fund, according to a March regulatory filing.
`Legacy Assets'
Pandit has said he'll get rid of ``legacy assets,'' including real-estate holdings and collateralized-debt obligations such as bonds backed by pools of mortgages.
``Closing down Old Lane is probably not something they wanted to do, but $9 billion for Citigroup, in the bigger scheme of things, is not disastrous,'' said Royal Bank of Scotland analyst Corinne Cunningham.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising assets and participate substantially in profits from money invested.
To contact the reporters on this story: Joyce Moullakis in London at jmoullakis@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.
Last Updated: June 12, 2008 12:37 EDT
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